Universal downgrades kneecapping to kick in nuts

Reserves nuclear option

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Universal Music Group (UMG) has responded to yesterday's report in the New York Times by declaring that it will continue to supply its catalog to Apple's iTunes store. It'll just do so on new terms, far more flexible than it previously enjoyed.

The Times reported that UMG had refused to renew its new annual contract with Apple. Apple therefore faced the prospect of seeing the world's biggest record label withdraw its repertory from the iTunes store. But Business Week reports today that UMG is keeping this nuclear option dry.

It cites anonymous sources who explain that UMG has made an "at will" arrangement, that "enables [UMG] to strike exclusive distribution deals with other digital music providers for individual artists or tracks, though it will continue to sell music through iTunes. Under the new arrangement, for example, Universal could charge another music e-tailer (or Apple, for that matter) a premium to sell Jay-Z's latest single exclusively for a limited time".

With Apple facing competition from ad-supported download services, it's hardly surprising UMG wants to retain flexibility with its pricing. But what UMG wants even more than Apple is to maintain a higher unit price for music, as competition from service providers drives the per-unit cost down, reducing the value of its assets.

That's competition, ironically enough, that Universal is helping to stimulate. UMG backed the ill-fated SpiralFrog venture, in which ad-supported songs would be available for free. The more services compete to offer music, the lower the price of music.

So what's the real price of recorded music?

Record companies typically gross about 65 cents on a 99 cent download from Apple's iTunes store, a small portion of which then goes to publisher and mechanical royalties. However, they may gain as little as 23 cents from a download from a subscription service such as eMusic, the argument being that what they lose in margin they make up for in volume.

A paper by MCPS-PRS Alliance economist Will Page examines what happens if it approaches $0.00 - and what this means for business and consumers of music. If you haven't already read it, it's highly recommended. [PDF, 366kb] ®